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Mar 20

Is NAFTA renegotiation an opportunity for Canada’s tech businesses and a new way toward digital modernization?

What about NAFTA renegotiation? What are the discussions about? Do tech businesses have to worry? What consequences could they face?

What is NAFTA?

NAFTA (North American Free Trade Agreement) is a three-country aggreement between Canada, Mexico and the US that entered into force in January 1994. The aim of the agreement was the elimination of most tariffs on products traded among the three countries and the liberalization of trade in agriculture, textiles, and automobile manufacturing. The deal also sought to protect intellectual property, establish dispute-resolution mechanisms, and implement labour and environmental safeguards.

NAFTA reshaped North American economic relations reinforcing integration between the US and Canada’s developed economies and Mexico, a developing country. Regional trade and cross-border investment between the three countries also grew significantly. Economists largely agree that NAFTA has provided benefits to the North American economies.

However NAFTA has remained a perennial target in the broader debate over free trade. President Trump is leading the fight and is very critical of the treaty. In that sense, in August 2017, his administration reopened negotiations with Canada and Mexico with the aim of reforming it.

What is the current context around the agreement and its renegotiation?

In August 2017, the three countries kicked off formal negotiations. Both Mexico and the U.S. have elections in 2018 so they hope to conclude the deal before that time. However, experts have suggested the deadline is unrealistic, given the drastic changes that have been proposed.

The Trump administration has said the talks will focus on reducing the U.S.-Mexico trade deficit, tightening rules-of-origin requirements, reforming the investor-state dispute resolution mechanism, and updating the pact to include digital services and intellectual property. Moreover, Trump is in favour of an “America first” attitude to trade, immigration and foreign affairs. However, both Mexico and Canada are hoping that the renegotiation will deepen integration rather than promote protectionist economic policies.

Regarding relations between countries, Canada and Mexico get on well, while this is not the case for Mexico and the U.S. whose relations have further deteriorated. This is seen through the anti-trade sentiment that can transpire through certain speeches from American politicians. For example, Trump said “Sure, absolutely” when asked whether he could imagine a bilateral deal with Canada instead of the current tripartite agreement that includes Mexico.

During the fourth round of NAFTA talks that took place in October 2017, tensions increased dramatically between the three countries due to the U.S. demands that threaten to derail the talks.

What is the link between these negotiations and Canada’s tech companies?

There are several ways the technology sector could feel the impacts: from changing the rules on how much tax Canadians pay when they do online shopping at U.S. retailer, to the prospect of relaxing data sovereignty requirements by the federal government, and many different other things which will be explained in this article.

So in this article, you will learn how NAFTA’s rework could change tech in Canada and if it’s an opportunity for Canada’s tech businesses and a new way toward digital modernization.

■ Renegotiation of NAFTA is an opportunity for modernization for the technology sector

Talks to renegotiate NAFTA represent a real opportunity for the technology sector. Indeed, the date on which the agreement was signed in its early days (1994), the technology was not really developed and certainly not at the level of development reached today. It is therefore an opportunity for this sector to come forward and to be taken into account as a priority of the points to be negotiated. Technology must be an integral part of such an agreement given the place it occupies today in all sectors of activity and in the lives of all the world’s citizens.

Finance Minister of Canada said: “We take this as an opportunity for improvement and it’s an opportunity to see how we work in sectors like the digital sector…”

The goal should be to update the pact to include technology and take into account digital services and intellectual property. Digital technology should receive a featured place, if not top of the list. Hopefully, the three countries will move in the same direction on this point, towards modernity and progress. This is certainly possible because they are all in favor of modernizing this tripartite agreement.

“I continue to believe in NAFTA. I continue to believe that as a continent working together in complementary ways is better for our citizens and better for economic growth, and allows us to compete on a stronger footing with the global economy”, Justin Trudeau said.

In addition, the technology sector should take advantage of this opportunity as this agreement has already benefited many sectors.

■ A digital-economy-era NAFTA for Canada

New NAFTA chapters should reflect the digital economy and implement new digital policies. This could have implications for Canadian privacy laws and digital policies already in place.

→ De Minimis threshold could be raised

Some of the digital economy policies should be relatively uncontroversial (consumer protection, online contract enforcement) but some could face stiff opposition. It could be the case for the De Minimis customs threshold. Indeed, if this threshold is increased from the current $20 to $200, Canadian retailers from many sectors including the technology one, would be exposed to more competition.

Nowadays, when Canadians are shopping online and spend more than $20 in that cross-border transaction, they must pay a duty on the purchase. This is the de minimis threshold and it’s the lowest such rate in North America. Indeed, Mexico’s threshold is $200 and the U.S. has an $800 threshold. It means that Canadians have more motivation to opt for an in-country option when shopping online.

At the negotiation table, Washington wants Canada to match its much more generous de minimis threshold. Canadian online merchants are against such a change and Canada’s tech industry fears a bigger competition from the U.S. tech companies.

Even more difficult than talks about the deminimis threshold will be U.S. demands that Canada refrain from establishing “data localization” rules that mandate retention of personal information on computer servers located in Canada. Indeed, in response to the public concerns, leading technology companies such as Microsoft, Amazon and Google have established or committed to establish Canadian-based computer server facilities that can offer localization of information. It was a goal of the federal government’s 2016 cloud-computing strategy that prioritizes privacy and security concerns.

So in the context of this new deal, what is expected to be discussed at the negotiation table is relaxed government regulations that require certain data to be stored in the country that it originates. Specifically, Washington has stated that it wants “rules to ensure that NAFTA countries do not impose measures that restrict cross-border data flows and do not require the use or installation of local computing facilities.”

This subject of data flows gives rise to controversy. Some persons say data should be allowed to flow freely across borders just like other products but others warn that the personal information of Canadians is being compromised.

There are Canadian companies seeing nothing wrong with a proposal by the U.S. that would forbid the storage of sensitive data in computing facilities on Canadian soil. They say data should be allowed to flow freely across borders and that the privacy of Canadians would not be compromised.

That view is clashing with another industry group, the Canadian Council of Innovators, which represents some of the country’s fastest-growing tech firms and investors. This group is calling on the government to resist the U.S. proposal.

“Based on my interactions, I remain deeply concerned about the lack of sophistication for the 21st century economy with our NAFTA team, and most especially and including data. My fear is our trade negotiators are guided on data policy by the big U.S. tech firms who tell us what’s good for Silicon Valley is good for Canada”, the council’s chair Jim Balsillie said.

Other establish a difference between several types of data. Thus, while some data is clearly private, there’s a vast trove of “non-critical data” that can and should be shared across borders.

Concerns about data and privacy have been stoked by fears of U.S. surveillance on private citizens. Indeed, the post 9/11 Patriot Act gives American law enforcement access to data stored in U.S. facilities. Revelations by whistleblower Edward Snowden have also raised concerns.

■ The threat of a potential sunset clause proposed by the U.S.

This idea of a sunset clause is a proposal from the U.S. government. This would terminate the agreement in five years without the approval of all three countries. Canada and Mexico, as well as the business community, are opposed to this suggestion. Canada and Mexico fear that this sunset clause would make investors unwilling to risk their money when the rules of the game could change a few years down the road. This works for technology companies. If they enter into contracts in the context of the treaty and it disappears several years after, they can face significant risks and lose a lot. This may therefore have the effect of curbing their actions if such a risk hangs over these companies and this sector.

Trump has been on the offensive in NAFTA renegotiations, with what many consider to be aggressive and unpredictable demands and the sunset clause is one of those.

■ Labour rules in the context of NAFTA renegotiation and their impact on tech businesses

→ Labour rules in Mexico and their impacts over businesses from the U.S. and Canada

First, just some words about Mexico and the persisting debate regarding this country and its labour principles. American and Canadian unions have another demand: strengthen NAFTA’s labour rules. Indeed, they are arguing that poor labour standards in Mexico have a real economic impact. For example, several companies relocate their activity to take advantage of workers who lack basic rights and are underpaid. This increase the competition between countries and businesses. The debate remain important because this competition is painful for some industries but in the same time others are gaining from the new market opportunities that were created.

So this is part of the discussions around NAFTA renegotiation and it could have consequences over tech companies, good are bad according to their initial commercial strategy.

→ Labour mobility and difficulties to cross the border for workers

NAFTA does ease the flow of labour between Canada, the U.S. and Mexico but only for workers in some 60 occupations, including doctor, dentist, lawyer, accountant, hotel manager, economist, engineer and scientist. Thanks to this list, people can easily get a visa to work across the border and procedures are easier for them.

Canada is in favor of freer movement of professionals so the country wants to expand that list to include jobs most in demand today, particularly in the high tech sector, which didn’t exist when NAFTA was negotiated 23 years ago. Indeed, this list was drawn up before the advent of the digital economy, e-commerce and all the jobs they entail. So the agreement does not include many high-tech jobs which simply didn’t exist when it was created. Moreover, international companies want this list expanded too to make it easier for employees to move between offices. So tech workers and other 21st-century careers should get onto NAFTA’s outdated list of professions with cross-border mobility rights.

Many trade experts had predicted that would be a non-starter with the U.S., given the protectionist “buy American, hire American” attitude of the Trump administration. They also said that it’s not realistic and that there is no hope of adding new jobs to the existing NAFTA list. However, Canada still hopes to reach a deal on that front and will try to negotiate in favor of an extended list arguing that the U.S. could benefit from Canadian workers’ skills and entrepreneurial initiative.

■ What about the tech industry lobby in NAFTA talks?

Farming and transportation groups have traditionally dominated lobbying on NAFTA, but recently technology lobbyists are helping lead the surge in efforts to influence Washington. Indeed, tech companies and trade organizations disclosed they had arrangements with lobby groups that discussed NAFTA with administration officials or lawmakers. The industry now has almost as many lobby groups representing its views on NAFTA as the transport sector which is the second main represented field after agriculture.

In that sense, technology companies, such as Microsoft and Cisco Systems have ramped up lobbying ahead of talks to renegotiate NAFTA. So Cisco Systems, a networking hardware company, had as many as 10 lobbyists working on NAFTA issues. Microsoft, which counts cloud computing and software as core businesses, had as many as 13 lobbyists working on NAFTA. They are both looking to avoid any future restrictions on cloud storage and to promote an international pact to eliminate technology goods tariffs.

However, it remains unclear how prominently tech concerns will feature at NAFTA talks given Trump’s focus on manufacturing.

■ Small Business have a new dedicated chapter in NAFTA

NAFTA renegotiation is uncertain and risky for small businesses. There is real concern that any changes to NAFTA could have significant effects on their ability to sell goods and services abroad. What is difficult for Canada’s small business owners is how to plan the future.

Stakeholders in NAFTA renegotiation know that small and medium businesses have to be helped and that they should not only focus on big corporations. The Canadian Federation of Independent Business (CFIB) congratulates the federal government, and its trade partners, for an agreement to include a new chapter in NAFTA focused on small and medium-sized enterprises. This new chapter, which recognizes the important role that small businesses play in the economy, will enhance SMEs ability to benefit from NAFTA.

“We are very excited to see that a renegotiated NAFTA will have specific measures to help small and medium-sized businesses trade across borders. […] When it comes to importing or exporting goods and services, SMEs sometimes lack the resources of larger firms. An SME chapter is an important step in encouraging more small businesses in Canada to trade with our partners in North America”, member of CFIB said.

In that sense, Canada’s small tech businesses could benefit from this new chapter as many other small businesses from different sectors. Tech entrepreneurs are waiting for the official and final deal to know exactly what will change for their business and how it could improve their commercial strategy.

Despite all that has been said in this article, it is difficult to predict what will be the outcome of these renegotiations. Indeed, the mood has gone from bad to worse in the last round of negotiation between the three countries. Moreover, as long as Donald Trump remains ensconced in the White House, NAFTA talks will be driven by American demands, with Mexico and Canada scrambling to respond and control the damage. The fact is that Trump remains unpredictable at the level of its demands but also at the level of his threat about a potential withdrawal from the agreement. It’s hard to predict the economic impact of a NAFTA termination and for now Canada’s government remains optimistic and hopes to conclude a new deal to update NAFTA.

However, NAFTA countries appear to have agreed they won’t be resolving their differences by the end of this year. U.S. Trade Representative Robert Lighthizer says NAFTA talks are being extended into 2018, and the next negotiating round is being pushed back too. So negotiators aren’t going to meet their original deadline for a deal by year-end.